To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over CDL Investments New Zealand’s (NZSE:CDI) trend of ROCE, we liked what we saw.
Understanding Return On Capital Employed (ROCE)
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for CDL Investments New Zealand, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = NZ$51m ÷ (NZ$285m – NZ$8.8m) (Based on the trailing twelve months to June 2021).
Therefore, CDL Investments New Zealand has an ROCE of 18%. That’s a pretty standard return and it’s in line with the industry average of 18%.
View our latest analysis for CDL Investments New Zealand
Historical performance is a great place to start when researching a stock so above you can see the gauge for CDL Investments New Zealand’s ROCE against it’s prior returns. If you’d like to look at how CDL Investments New Zealand has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From CDL Investments New Zealand’s ROCE Trend?
The trend of ROCE doesn’t stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 83% more capital into its operations. Since 18% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
What We Can Learn From CDL Investments New Zealand’s ROCE
In the end, CDL Investments New Zealand has proven its ability to adequately reinvest capital at good rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we …….